Public Provision of Sports Stadiums / by Todd Yarbrough

The basic idea of public provision of a private good, such as education, revolves around the degree to which a private market provision either increases or decreases social capital relative to a public provision. For example, we may conclude that the private market would inefficiently produce/consume education by under providing it, relative to public education. And the reason this is likely true is because while education is a private good for those that consume it, the benefits of privately realized education spillover onto others. i.e. if I'm educated I'm less likely to rob you and more likely to contribute to social capital. Therefore, some public provision is justified, as long as the opportunity cost of such provision is less than the benefit to society from such a provision. For education the extent of public provision is justifiably large. On the other hand, the private market is much more likely to adequately produce/consume a good like hamburgers, where no such spillovers exist. So, the extent to which public provision is optimal will wrest largely on how inefficient a private market is at providing the good, relative to social capital. For some markets (national defense) the optimal public provision is near 100%, in which the govt provides all of the good. For other markets (t-shirts) the optimal public provision is near 0%, in which the govt provides none of the good. 

To put it another way, public provision exists to make up for the loss in social capital from a purely free market which is likely to under provide a good that produces more than just private benefit. So, when we ask ourselves if the public provision of sports stadium funding is justified, we need only look at two numbers: 

1) The opportunity cost of such funding, or the value of the next best alternative to a new sports stadium.

2) The increase in social capital from such funding, or the value of the benefits which flow to the public once the stadium is built. 

If the opportunity cost of public provision of sports stadium funding is less than the social benefit created by the sports stadium itself, then we are justified in using public funds. However, if the opportunity cost is higher, we're inefficiently using public funds to increase production/consumption of a private good. In other words, that public funding would be spent more efficiently on other goods, such as education, infrastructure, and/or non-new-stadium neighborhood redevelopment. Essentially what we're trying to estimate is the social benefit of a sports stadium and compare it to the social benefit of some other provision. 

For sports stadiums, the increase in social benefit is always framed as an increase in the growth of the local economy created by the stadium. So, when the decision to use public funds for a sport stadium is made, the government is signaling their belief that the economic benefits of a new sports stadium are going to be greater than ANY other benefit that could have been created using those funds.

So, what about the economic benefit of sports stadiums? 

When an NFL team wants to build a new stadium, it often argues that the facility would boost the local economy.

But that is not true, says Roger Noll, a Stanford professor emeritus in economics. A former senior economist for the President's Council of Economic Advisers, Noll is an expert on the economics of sports.

"NFL stadiums do not generate significant local economic growth, and the incremental tax revenue is not sufficient to cover any significant financial contribution by the city," said Noll, a senior fellow at the Stanford Institute for Economic Policy Research. He has written articles and books and giventalks on the public financing of sports stadiums.

Studies mentioned in the article above make it hard to fathom why govts continue to pour public funding into sports stadiums, while arguing that they're doing so because of the potential for huge economic gains. Again, the decision to use public funds for sports stadiums does not seem to be a difficult decision when one considers that the MAIN talking point in favor of such provision is seemingly false.

So, why would Detroit decide to create a new tax to generate $284.5 million dollars in public funding to be used on a new Red Wings arena? 

Of course, one only needs to follow the money....

George Jackson is the former president and CEO of Detroit Economic Growth Corp., a non-profit organization that the city of Detroit contracted to conduct negotiations on the Red Wings stadium deal. Jackson resigned from the DEGC in 2014, and went on to start his own real estate consulting firm. This past November, Jackson’s firm was contracted by Ilitch’s arena development company to help with the $627-million stadium and real estate deal.